Fruit’s the real deal for Coca-Cola in India
Amid a shift by Indian consumers from carbonated beverages to fruit-based drinks, Coca-Cola is going local to ensure a product for every region
There’s a new Coca-Cola in the making in India, 25 years after the world’s largest beverage maker entered the market for the second time.
Coca-Cola India Pvt. Ltd, the local unit of The Coca-Cola Company, is banking on everything local—flavours, fruits and brands—in the hope of getting more Indians to drink its packaged beverages. And the change is already visible.
In the past one year, the Atlanta-based maker of Coca Cola and Sprite has launched a bouquet of products in traditional Indian flavours like jal jeera and fruits like santra (orange), guava, anar (pomegranate), litchi, and specific mango varieties—Himsagar and Langra that are grown only in West Bengal. It wants to take a hyper-local approach to ensure its portfolio has at least one product for every Indian.
The change in strategy comes after the firm identified that growth has been held back in the country because it did not have the “right product at the right price point”.
This is coupled with the challenge that while most Indians are yet to taste Coca-Cola’s carbonated drinks, consumers are switching to healthier options such as fruit juice.
In fact, fruit juice is the only product segment where Coca-Cola has gained market share in the past five years. According to data compiled by market research agency Euromonitor International, Coca-Cola’s shares in the juice segment rose to 31.1% (retail volume) in 2017 from 28.5% in 2012, while it lost share in its core carbonated beverages from 60.8% in 2012 to 56.3% in 2017. In the water business, its share dropped to 9.7% in 2017 from 12.6% in 2012.
While fruit juice becomes a natural choice for expansion, even though it is a low-margin business (compared to its core carbonated drinks), Coca-Cola is not restricting itself to this category. It has started mixing fruit juices in most of its aerated drinks to create a new segment that attracts a lower tax.
There’s more—it has entered the frozen desserts segment with a product made of fruits. Here, too, the firm has opted for local fruits.
Last but not the least, 25 years after it acquired home-grown aerated drink brand Thums Up from Ramesh Chauhan of Mumbai-based Parle Group, Coca-Cola has finally decided to take it global, starting with neighbouring countries such as Bangladesh, Sri Lanka, Bhutan and Nepal.
The changes the firm is implementing are in line with Coca-Cola’s global agenda of transforming itself into a “total beverage company” from being a carbonated drinks maker. At the heart of the transformation is Krishnakumar Thirumalai, president of the firm’s India and South-West Asia operations, who took charge on 1 May 2017 after predecessor Venkatesh Kini decided to move on after being at the helm for over four years.
The new man on the job
Krishnakumar, or KK as he’s fondly known, hardly looks like the quintessential chief executive of an American multinational. Unlike his predecessors Venkatesh Kini and Atul Singh, who were rarely seen without a suit and a tie, Krishnakumar has devised his own dress code—half-sleeved white shirt, khaki trousers and round Gandhi-style spectacles.
Apparently a man of few needs, he lives in a two-bedroom apartment in Gurugram. Like many traditional Brahmins, his day starts with hour-long prayers, whichever part of the world he is in (preceded by an early morning walk). Krishnakumar wakes up at 4am and reaches work at around 8am. He says his simple lifestyle is a reflection of his growing up years in Mylapore, an old residential neighbourhood in Chennai. He struggled to speak “fluent English” up until the end of his second job at Chennai-based Murugappa Group’s Parry Confectionery, which was later sold to Lotte. “It is not necessary to be high profile as long you put in your 100%...One does not need to be in business suits to succeed,” says the 58-year old.
Despite his formidable un-CEO-like lifestyle and appearance, Coca-Cola found Krishnakumar “uniquely qualified” to take charge of India, Bangladesh, Bhutan, Maldives, Nepal and Sri Lanka. According to John Murphy, president (Asia Pacific Group), Coca-Cola, Krishnakumar is a “strategic, well-rounded leader and a catalyst for expanding the company’s portfolio and driving growth”.
That’s precisely what Coca-Cola needs right now. Coca-Cola’s India unit has witnessed slower growth in the past couple of years, along with a decline in volume for several quarters starting the last quarter of calendar year 2016 (October-December 2016)—a time when India went through invalidation of high-value bank notes that took out almost 86% of currency in circulation by value. However, it’s reported an increase in volume sales beginning the third quarter of the current fiscal year.
Yet, the company, with a market capitalization of $186billion, aims to make India, which currently accounts for less than 1% of its global sales of $41.48 billion, the third-largest market globally, moving up from sixth at present. Currently, it trails the US, Mexico, China, Brazil and Japan.
To that end, Coca-Cola will have to multiply its revenue in India. “This dearth of a sufficient number of products has prompted Coca-Cola to expand its portfolio across categories, and in this regard, it is testing 20 new products made locally,” Boston-headquartered Trefis, a market research firm, said in a note on 27 November 2017.
And that’s driving Krishnakumar’s single-point agenda—create a “value” proportion for “every consumer” so that more and more Indians buy Coca-Cola products as they migrate to packaged drinks.
It’s an ambitious target that James Quincey, global chief executive officer of Coca-Cola, has set for his colleagues—to make India the third-largest market. The good news for Krishnakumar is that India is home to 1.3 billion people and a majority of them are yet to taste any beverage made by Coca-Cola.
But Jagdeep Kapoor, chairman and managing director of Samsika Marketing Consultants, says the firm has only been focusing on the “metro and top towns” in recent times. “That’s not the market where Coca-Cola will get its next billion from. That will come from non-urban markets—the 650,000 villages in India. Interestingly, that’s a ready market waiting for the products—thanks to mass media like television that has created the demand. That’s where Coca-Cola needs to penetrate with ‘right portion at the right price’ and invest in for a sustainable future,” says Kapoor.
According to Kapoor, who was a director at Parle Agro between 1989 and 1994—the period when the group sold Thums Up to Coca-Cola, the best thing that Coca-Cola has done is to buy Thums Up and keep the brand in its original form.
Meanwhile, competition in India has been on the rise. Besides rival PepsiCo Inc., which has been struggling to grow in India for the past five years, Coca-Cola has been losing market share in the core carbonated beverages segment to regional brands such as Bovonto in Tamil Nadu, and Jayanti Cola and Xalta in northern India. These are brands that play the low-price card.
Luckily for Coca Cola, its juice portfolio—Maaza and Minute Maid—has been growing. This has come in the face of stiff competition from PepsiCo’s Slice, Parle Agro’s Frooti and Manpasand Beverages’ MangoSip. In addition, PepsiCo’s Tropicana, home-grown Dabur India Ltd’s Real and Kolkata-based ITC Ltd’s BNatural are competing with Minute Maid. Besides, start-ups like Hector Beverages Pvt. Ltd’s Paper Boat traditional drinks, and lately yoga-guru-turned businessman Baba Ramdev’s Patanjali Ayurved have also entered the segment.
“A rise in disposable incomes, increasing health awareness, and the adoption of western culture are some factors driving the growth in this market. Packaged juices are gradually cementing their place in the urban markets, but replicating this success in rural areas is a struggle as consumers in these regions prefer fresh juices. It is not a doubt that gaining significantly in this market will be a tough task, but it is definitely where the growth lies in India,” Trefis noted. At present, the packaged juice market in India is estimated at $290 million.
Sales of carbonated drinks have been slipping in most parts of the world. In the past 15 years, the contribution of carbonated drinks to Coca-Cola’s global revenue has dropped to 70% from 90%, and this is expected to fall further to 50% by 2025.
Trefis, in its analysis, noted that between 2010 and 2015, carbonated drinks in India grew at around 13% annually, compared to nearly 28% for juices. “This strong growth is expected to continue, at a CAGR of 17% between 2016 and 2021. Given the high growth predictions, Coca-Cola’s future in the market depends largely on tapping the potential of this segment,” it added.
Given the context, it’s easy to see why Quincey wants the 132-year-old firm to evolve as a “total beverage company”.
On 23 February 2017, even before taking over as CEO, Quincey had set the tone for reshaping the company to look at what consumers want rather than pushing the products the company already has.
The focus was on expanding in five category clusters—sparkling, energy, juice/dairy/plant-based, water/enhanced water/sports drinks and ready-to-drink coffee and teas—to include more low- and no-sugar options and drinks in emerging categories. The intent was to prioritize “value share over sales volume” and move to a leaner operating model.
Traditionally, local entities of multinationals have replicated the actions of the global headquarters. Even at Coca-Cola, although the global mandate is to create a consumer-centric portfolio, Krishnakumar will have to figure out the psyche and changing consumption behaviour of Indian consumers who are rapidly switching to healthier options like fruit-based beverages, and then create the products strategy accordingly.
His predecessors primarily pushed the products from the global portfolio in this market.
“Localization is a need for every firm, especially because Indians have a regional palate. In India, what you need is a good mix of global, local and localized global products to have a sustainable future. And you need to change as Indian consumers’ preferences change,” said Debashish Mukherjee, partner (Asia-Pacific), A.T. Kearney.
Finding fortune in fruits
For Coca-Cola in India, fruit is the flavour of the season. But that’s nothing new. The company has been selling fruit-based drinks under Minute Maid since 2007 using fruits sourced from the Indian market. What’s new, however, is that besides existing flavours like orange, apple and mixed fruit—which are also sold in many countries—the company now using guava, anar, litchi, and is planning to launch santra and different kinds of Indian mangoes.
“To revive its double-digit growth in the region, the company is focusing on locally-made products, such as Nagpur orange juice for the state of Maharashtra,” said Trefis. It has also launched extensions of its mango drink Maaza with different varieties of mangoes.
However, the use of new fruits and flavours may not be sufficient.
To increase profitability, even in low-margin fruit juice, Krishnakumar wants to control sourcing of fruits and its journey from farm to retail. Little surprise then, that on 18 May 2017, just about two weeks after he took charge, the company announced Asim Parekh as vice-president (fruit circular economy) for the region—a newly created position—to have control over the entire sourcing supply-chain of fruits aiming to source more fruits from India in the coming years to cater to its global requirement of ingredients. “We will be making interventions across the value chain starting from the farm-gate,” Coca-Cola said at the time.
Although the firm has been sourcing its fruits from different regions including Argentina and Africa, this is the first time that Coca-Cola is planning to control the entire sourcing supply chain of fruits globally. And it was Krishnakumar’s idea which is expected to improve the profitability in fruit juice.
“Fruit juice is a low margin business, and the sourcing supply chain is costly. Also, there’s lack of infrastructure. While the government has announced a few things, that’s not enough. By controlling sourcing supply chain end-to-end, it could enhance profitability but at a larger scale,” said an analyst with a Mumbai-based management consulting firm, asking not to be named.
The hyper local recipe
Krishnakumar’s team is also adapting a hyper-local strategy in launching products.
Here on, instead of products from Coca-Cola’s global brand portfolio, the company will focus on developing products in India for the local market that are more suited to palates of a particular region, or income class, or even parts of an Indian state, especially in terms of flavours.
But these need to make commercial sense. “We can even launch a product that has the potential to attract half a million consumers. That makes it viable. And, there’s always a way to re-engineer things to make it viable,” said Krishnakumar.
In addition, the local unit of the American beverage maker has decided to revive some of its acquired brands with ethnic flavoured beverages. Coca-Cola will launch jal jeera under RimZim, originally a masala soda brand acquired from Ramesh Chauhan, along with other cola brands such as Thums Up, Maaza and Limca, among others.
In the last few years, several firms have launched a bunch of products in ethnic flavours. While companies like home-grown Dabur are relatively new to join the party with products like Hajmola Yoodley, it was Hector Beverages’ Paper Boat which popularized the ethnic flavoured drinks in unique packaging.
“There are waves that go through our country. You just need to ride the wave. We don’t have solutions for everything. But, we’ll find them,” says Krishnakumar. The company is also extending its water brand Kinley to a range of aerated drinks with flavours such as lemon, orange and jeera. In the past couple of years, it has launched products such as Vio (a milk-based drink) and Zico (packaged coconut water) that got limited success.
The attempt to capitalize on “everything Indian”, says Nitin Gupta, professor of marketing at Institute of Management Technology (IMT), Hyderabad, “is in the right direction” for Coca-Cola in India which was not “able to break its elite American image, and over time lost its appeal to the vast segment of Indian consumers especially in case of beverages”.
According to Gupta, Indian consumers are looking for variety and flavours with an Indian touch, which preferably should have some health benefits (or at least should not have ill-effects on the health).
“Many Indian and international players are trying hard to fulfil this requirement of theirs. If Coca-Cola is able to outshine competitors in fulfilling this requirement of the Indian consumers, it can look forward to a sustainable growth in the future,” he adds.
Need for speed
Sitting in his corner office in Coca-Cola India’s headquarter in Gurugram, Krishnakumar reflects on the consumption habits of consumers.
“What we have done in the last 10 years, we’ll have to do in next three years,” he said, adding that the company needs to take rapid strides as consumers are evolving “very fast”. This, he believes, will take India one notch up in Coca-Cola’s global scheme of things within next 2-3 years—the first milestone he has set for himself.
The result-oriented engineer from Madras University and an alumnus of Indian Institute of Management, Bangalore, who calls himself “solid on facts” has brought Coca-Cola back into action.
Under Krishnakumar, the Indian chapter of the firm has been on a product launch spree — in 2017 the company launched around 17 new products, most of them local.
It launched the extensions of fruit juice brand Minute Maid including frozen fruit desserts (Perfect Fruit), extensions of mango drink Maaza— first time since its launch in 1998—and a few international products such as premium packaged drinking water brand Glacéau Smartwater.
“Decision making has become faster. That’s because they have got some of the best performers from Coca-Cola globally,” said Neeraj Kakkar, co-founder of Hector Beverages, the maker of Paperboat, who worked with Hindustan Coca-Cola Beverages before starting his venture that has disrupted the packaged beverage industry.
Next in the pipeline are extensions of best-selling beverage brand Sprite and the third-largest aerated drink Limca. These will be fruit juice variants in sync with Indian consumers’ fast-evolving beverage preferences towards healthier options. They will also add a “little” to profitability as they attract lower taxes, says a New Delhi-based analyst, asking not to be named.
Fizzy fruit drinks in India got a push after Prime Minister Narendra Modi, in September 2014, urged companies like Coca-Cola and PepsiCo to mix natural fruit juices (at least 5%) in aerated beverages to help boost fruit sales for Indian farmers. Not just Coca-Cola, rival Pepsi too has fizzy fruit versions of Nimbooz and Slice while Mumbai-Based Parle Agro Pvt. Ltd launched fizzy version of its popular mango drink Frooti in March 2017.
While part of Krishnakumar’s daily prayers may be to help him take Coca-Cola India to a high-growth, better-margin and healthier volume path, he will also have to reinvent the beverage maker’s offerings to make them better suited to the Indian palate.
“What keeps me up is how I can manage to stay relevant to consumers tomorrow. And the challenge gets multiplied in India as there are so many different cultures and sections of society,” said Krishnakumar, adding that his journey is going to be to get Coca-Cola “aligned more” with what Indian consumers’ need and not to “restrict” itself to any particular category.
Reshaping the bottling arm
Coca-Cola owned bottling unit Hindustan Coca-Cola Beverages Pvt. Ltd has been undergoing restructuring too.
“The company is apportioning more resources to its frontline and field—both financial and human. This includes the setting up of the premium division to service customer requirements around niche and premium beverages—Smartwater, frozen fruit desserts, mixers and tonic water etc, and amalgamating the existing Alternate Beverages Division to the mainstream distribution system,” Mint reported on 28 November 2017.
The bottling arm, with 21 plants that account for about 67% of Coca-Cola’s business in India, is also targeting to reach $2.5 billion in revenue by 2020. For the year ended 31 March 2017, revenue stood at Rs9,472 crore, the report said.
“It was very clear from our research, conversations and market data that today, we are not structured in a way that allows us to fully leverage our scale and market capabilities,” Christina Ruggiero, chief executive of Hindustan Coca-Cola Beverages, the bottling arm, said in the statement. Ruggiero joined Hindustan Coca-Cola in May last year after Krishnakumar moved to Coca-Cola India.
Hindustan Coca-Cola, which shifted its corporate headquarters to Bengaluru from Gurugram earlier this year, has reduced workforce in line with the global plan to move to a lean organizational structure by cutting about 1,200 jobs as it expands its savings target amid falling demand for fizzy drinks globally.
“The reorganization will however make a few existing jobs redundant, the incumbents of which will be encouraged to apply for the new jobs that have been created”. It will operate under seven zones, instead of five at present, and focus more on sales and supply chain. To do that, the company will move to a leaner corporate office and allocate resources to strengthen sales and supply chain, added the Mint report.
Signs of revival
For the quarter ended 31 December 2017, Coca-Cola India, which has been witnessing slower growth during the past few years, posted revenue growth in “strong double digits” backed by volume growth at “strong single digit”, Krishnakumar said on 22 February. This, however, may not reflect the real state of the company’s business as the growth number is in comparison with the October-December 2016 quarter when India went through demonetization and the company’s sales declined.
But, the company claimed to have grown at a double digit rate in the July-September 2017 quarter as well. Its volume growth was at 6% during that quarter, Quincey had said in an investor call in October 2017.
According to its corporate filings with the Registrar of Companies (RoC), between 2012-13 and the fiscal year ended 31 March 2016, the profits of Coca-Cola India Pvt. Ltd, the concentrates arm, increased to Rs474 crore from Rs320 crore, and revenue from Rs1,438 crore to Rs1,757 crore. During the year ended 31 March 2017, it reported revenue at Rs2,189.29 crore, according to RoC data. Financials of its bottling entities are reported separately.
Sales in India and south west Asia, which includes markets like India, Bangladesh, Sri Lanka, Nepal, Bhutan and the Maldives, “dropped by a low single digit” during January-March 2017, while it reported an 11% growth in the corresponding year-ago period. During the full year 2015-16, its profit in India fell by about 6% while sales were flat.
However, Coca-Cola still does not reach most parts of the country. Of the estimated 9 million retail outlets in the country, Coca-Cola products are sold at only 2.6 million stores. Its bottling arm Hindustan Coca-Cola, however, is aiming to add 1 million new outlets by 2020. Still, the large chunk is left untouched, especially in the non-urban markets where supply chain for cold beverages is still a challenge due to scarcity of power and other infrastructure.
To solve the problems, the company will need fresh investments. And, Quincey is yet to allot anything extra to its planned investment of $5 billion by 2020 in India, announced in June 2012. But Krishnakumar isn’t worried. His motto is: “Don’t look at the problem, look for solutions.”
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